Not-for-profit reporting series: Presentation of investment return and expenses

A recently released standard focuses on providing greater transparency to not-for-profit financial statements and notes regarding liquidity, financial performance, and cash flow. Ultimately, Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, enhances a not-for-profit entity’s ability to tell its financial story.

In a series of articles on the new standard, we’re taking an in-depth look at the changes it requires. Although it won’t take effect until fiscal years beginning after Dec. 15, 2017, early adoption is permitted, so it’s a good idea to assess how this will affect your organization in the future and how it might benefit today.

These new requirements are designed to enhance the usefulness of the GAAP-based financial statements that not-for-profits provide to donors, grantors, creditors, and other stakeholders. In this part of the series, we’ll cover changes to the presentation of investment return and expenses.

The current standard

There’s a lack of consistency in the presentation of investment return and expenses on the statement of activities. Not-for-profits are also required to disclose investment expenses on the face or in the notes of financial statements. This leads to a lack of comparability between organizations.

Additionally, investment return presented in the reconciliation of an endowment’s beginning and ending balances is separated into the following:

• Investment income — interest, dividends, and rent, for example
• Net appreciation or depreciation of investments

What the standard changes

Not-for-profits will now present investment return net of related investment expenses, which will include both external and direct internal investment expenses, on the statement of activities. The net presentation of investment return will also require expenses to be included in the net asset categories in which investment return is reported — for example, net assets with or without donor restrictions. Direct internal investment expenses are those produced in the direct conduct or supervision of activities that generate investment return, such as:

• Employee costs.